Word reaches Banking Day that various players in the accounting and corporate world are contemplating the nature of goodwill in their accounts yet again, following a year in which some companies were forced to shut up shop and assess various assets for impairment.
The accounting for the lump of money that is left over when people have placed what they believe to be a reasonable value on identifiable assets is always going to be a challenge.
Some argue it is evidence of a business paying too much for an acquisition. Other people see it as literally accounting for the importance of the intangible value of a business.
No matter how you see it there is a continuing controversy when companies face off with regulators on their accounting for this sometimes rather large lump.
Boards and auditors were reminded of this last week, when the corporate regulator, ASIC, noted that a company decided it would take a large hit to the bottom line related to impairment write downs.
“ASIC notes the decision by LawFinance Limited (LawFinance) to recognise impairment write-downs of $40.9 million to goodwill and $12.6 million to deferred tax assets in its financial report for the year ended 31 December 2020,” the corporate plods media release states.
“ASIC had made inquiries on the recoverability of goodwill and deferred tax assets in LawFinance’s financial report for the year ended 31 December 2019 and half-year financial report for the period ended 30 June 2020.”
ASIC also makes clear in its media release that these issues related to asset impairment were hot topics of interest to the corporate regulator in the review of financial statements.
This never ending cycle of discussion about impairment and how difficult things are to calculate might well make some yearn for the days when life was easier - and the difference between what you paid and the carrying amount of identifiable assets was amortised using a straight line method over a period not exceeding 20 years.
Today’s accounting is designed to account for the entity that was acquired and to recognise the worth paid for by the acquirer.
Going back to a straight line method of amortisation for goodwill would be too easy, and, in addition, it would deny the complexity of businesses and the existence of goodwill as an asset despite it being difficult to define.
A simpler accounting that does not acknowledge the range of factors that go into taking an enterprise over, for example, also reopens the question that can be asked of companies about the assets they have just bought: why the heck did you pay so much in the first place?